As the newspaper industry navigates a decline in print circulation and advertising revenue, hometown owner Warren Buffett is assigning the fate of his own BH Media Group to an out-of-town company.
Lee Enterprises of Davenport, Iowa, will manage The World-Herald and the 29 other Berkshire Hathaway-owned daily newspapers, the companies announced Tuesday in a five-year agreement that could bring Lee $50 million over five years.
The deal comes as local newspapers struggle to keep up with a changing media landscape, even as their online audiences are growing.
“We’re really confident that we can do this,” said Mary Junck, executive chairwoman of Lee, on managing Buffett’s newspaper chain, which began with the purchase of The World-Herald for $200 million, including debt, in 2011.
After an analysis of BH Media, Junck said, “we see good opportunities in a number of areas” to improve the newspapers’ financial performance, including cost reductions, increased number of subscriptions and more digital revenue. Lee is known for having some of the largest profit margins in the newspaper business.
Berkshire Hathaway doesn’t break out the financial performance of its BH Media properties, though executives have said the newspapers are profitable.
Buffett has tasked Lee with managing the Berkshire newspapers “the same way we manage our own,” Junck said. Berkshire will retain ownership of the papers.
Lee President and Chief Executive Kevin Mowbray said Lee has a five-year plan for added revenue and “cost synergies” and would confer with BH Media managers this week. “It’s coming right out of our playbook.”
As part of the Tuesday announcement, BH Media Chief Executive and World-Herald Publisher Terry Kroeger said he was stepping down from the company.
Starting Monday, Lee will operate the two largest newspapers in Nebraska. Lee owns the Lincoln Journal Star. Editorial decisions for The World-Herald and other BH newspapers will remain with those newspapers, the companies said.
BH Media accounts for a tiny fraction of Berkshire Hathaway’s $242 billion in revenue, but Buffett has said he bought the newspapers because he loves the business and believes in their role in society. BH Media’s holdings also include the Richmond Times-Dispatch in Virginia and the Tulsa World in Oklahoma, along with dailies in North Platte, Kearney and Grand Island.
BH Media’s print circulation has dropped about 15 percent since 2015, and, like most newspapers, it has struggled to build digital subscriptions and advertising as audiences have shifted from print to online.
The efficiencies achieved by Lee could include staff cuts, industry watchers said.
Rick Edmonds, media business analyst for the journalism research center Poynter Institute, said Lee “may well operate the (BH Media) properties less expensively, a little more leanly, possibly with newsroom cuts — although operating lean and cutting the newsroom are not necessarily the same thing.”
Some newspaper chains save money by using “shared services” such as regional desks for copy editing, page design or other functions, he said. Lee has a reputation for cutting news staffs, he said, but it’s not clear whether that would happen at BH Media papers, although Lee executive Mowbray mentioned shared services as a possible savings method.
The agreement allows Lee to reduce staffing without Berkshire Hathaway’s permission. It doesn’t allow Lee to make bigger overhauls, like outsourcing printing or changing days of the week of publication, without Berkshire Hathaway’s OK.
It’s possible that nearby printing plants may be consolidated to save money, Edmonds said. The World-Herald and the Lincoln Journal Star are about 60 miles apart and each has its own printing plant, in addition to separate news staffs.
Lee executive Junck noted that the Omaha and Lincoln newspapers are the only geographic overlap between the two companies’ chains.
Edmonds said the BH Media newspapers were “patched together” by Buffett over the past several years and are somewhat like family-owned newspapers that have been slower to adapt to changes in technology, such as a good computer program to sell digital subscriptions.
Lee may bring that expertise to the BH Media papers, he told The World-Herald.
Raju Narisetti, a former executive for News Corp., the company that owns the Wall Street Journal, said the newspaper business across the U.S. is “quite distressed.”
“Any rational attempt to try and make the business math work is laudable,” Narisetti told The World-Herald.
Had Buffett tried to sell the BH Media newspapers, they would have gone for “fire sale” prices, he said, and Berkshire Hathaway doesn’t exactly need the meager cash they would draw.
If a so-called strategic buyer had come along and larded the company up with debt to finance a purchase, then the debt service could have meant severe cuts to the newsrooms, Narisetti said. He now runs the Knight-Bagehot Business Fellowship program at Columbia University.
“By not selling the chain to a vulture owner, Warren Buffett continues to be a better steward of these news assets than many might want to give him credit for this week,” Narisetti said. He noted that the agreement gives Berkshire a say-so on some of the biggest decisions, meaning it could stop Lee from making changes that could undermine the longer-term value of the properties.
In a statement announcing the agreement, Buffett said, “I love our newspapers and am passionate about the vital role they serve in our communities. Although the challenges in publishing are clear, I believe we can benefit by joining efforts.”
Buffett is familiar with Lee, having not long ago lent it $94 million toward refinancing some of its $500 million debt, which came about in large part from buying the St. Louis Post-Dispatch in 2005 in a $1.46 billion transaction.
Junck, Lee’s executive chairwoman, said she shares Buffett’s love of newspapers and has discussed the “joys and responsibilities” of newspapering with him.
BH Media has 30 dailies with 740,000 in Sunday circulation compared with Lee’s 49 dailies and 1.4 million circulation.
Mike Reilly, vice president for news at BH Media and former executive editor of The World-Herald, said Lee has been “a neighbor and industry partner” for years. “I’m hopeful we can learn more from Lee in our shared challenges to deliver great journalism, advertising and customer service for print and digital readers.”
Phil Taylor, president of The World-Herald, said in a letter to employees that the company expects to benefit from Lee’s digital experience but that Lee executives Junck and Mowbray “emphasized this morning that their company expects to learn from us, too. Both companies share the same goal: to thrive as businesses by delivering valuable journalism, advertising solutions and customer service to our customers.”
The agreement does not include Berkshire’s television properties or the Buffalo News in New York, which Berkshire owns outside of BH Media. BH Media had 3,719 employees at the end of 2017, according to Berkshire, down from 4,042 at the end of 2015.
Following disclosure of the management agreement early Tuesday, Lee’s stock price jumped about 20 percent on the New York Stock Exchange, although it’s down by half since March 2014 and down about 95 percent since March 2004.
Lee’s goal is to earn $50 million in fees over the five-year agreement, Junck said. Half of that would come from an annual fixed fee of $5 million a year and the other half from percentages of BH Media profit higher than a benchmark of $34 million per year.
The agreement calls for Lee to receive one-third of the profits over $34 million in the first two years and one-half in the final three years.
The agreement names Mowbray as Lee’s “relationship manager” and Ted Weschler, an investment manager for Berkshire, as the “relationship manager” for BH Media.
Besides The World-Herald, the Berkshire dailies are the Dothan Eagle and the Opelika-Auburn News in Alabama; the Daily Nonpareil in Council Bluffs; the Grand Island Independent, Scottsbluff Star-Herald, North Platte Telegraph, Kearney Hub and York News-Times in Nebraska; The Press of Atlantic City, New Jersey; the Winston-Salem Journal, Greensboro News & Record, The News Herald in Morganton, The McDowell News, Statesville Record and Landmark and Hickory Daily Record in North Carolina; Tulsa World in Oklahoma; the Florence Morning News in South Carolina; the Eagle in Bryan-College Station and the Waco Tribune-Herald in Texas; and, in Virginia, the Richmond Times-Dispatch, the Daily Progress in Charlottesville, the Roanoke Times, Bristol Herald Courier, News & Advance in Lynchburg, Martinsville Bulletin, Danville Register & Bee, the Free Lance-Star in Fredericksburg, Culpeper Star-Exponent, and the News Virginian in Waynesboro.
Lee has daily newspapers and nearly 300 weekly and specialty publications in markets including St. Louis, Missouri; Madison, Wisconsin; Billings, Montana; Bloomington, Illinois; and Tucson, Arizona.
For the first time in at least 15 years, Kaho Subow, a Somali-born U.S. citizen living in Omaha, was finally going to be able to live with her mother, a Somali-born refugee living in Africa.
Then last month the process came to a halt. Subow’s mother was told that she would not be going to the U.S., and the reason, Subow recounted through a translator, was this: “The president of America refused.”
“They told her she cannot come because of Donald Trump’s new policy,” said Somali translator Mohamed Mohamed, referring to Trump’s controversial executive order that was upheld Tuesday by the U.S. Supreme Court.
Called the “travel ban,” Trump’s policy — fully in place since December — applies to travelers from five countries with overwhelmingly Muslim populations: Iran, Libya, Somalia, Syria and Yemen. It also affects two non-Muslim countries, blocking travelers from North Korea and some Venezuelan government officials.
The government argued that the ban was about national security and that affected countries hadn’t met vetting requirements.
The court sided with Trump, who said the decision was a great victory for the U.S. Constitution and “a moment of profound vindication.”
The Nebraska Republican Party issued a statement applauding the ruling: “It’s clear that the President was within his constitutional authority to keep Americans safe. This gives the federal government the opportunity to shore up our refugee program so terrorist organizations like ISIS cannot infiltrate them.”
Writing for the majority in the 5-4 decision, Chief Justice John Roberts said presidents have substantial power to regulate immigration and rejected claims of an anti-Muslim bias. Roberts upheld the government’s rationale that preventing the travel was in the interest of national security, but noted: “We express no view on the soundness of the policy.”
In her vehement dissent, Justice Sonia Sotomayor said the court’s ruling is a rebuke to religious freedom. Citing Trump’s past public statements about Muslims, she wrote: “It leaves undisturbed a policy first advertised openly and unequivocally as a ‘total and complete shutdown of Muslims entering the United States’ because the policy now masquerades behind a façade of national-security concerns.”
Sotomayor said the decision “turns a blind eye to the pain and suffering (inflicted) upon countless families and individuals, many of whom are United States citizens."
That view was echoed Tuesday by local refugee and immigrant advocacy groups:
Nebraska Appleseed’s federal policy director, Omaid Zabih, called it “an affront to our long-standing tradition of welcoming new neighbors into safe homes.”
Stacy Martin, president of Lutheran Family Services, said the decision “runs counter” to the values of Americans and Lutherans. After World War II, she said, one out of every six Lutherans in the world was a refugee or displaced person. “Lutherans know not only welcome but know the stigma of being painted unfairly,” she said in a statement.
Martin is inviting Omahans to a picnic from 6 p.m. to 8 p.m. Wednesday at Stinson Park. The event, billed as not political, is aimed at standing with refugees and immigrants.
The number of refugees resettling in the U.S. has plummeted. The latest figures show a 67 percent drop so far this fiscal year compared with last. Some 16,000 refugees and those with special immigrant visas were resettled in the U.S. between Oct. 1 and June 22. Over the same period last year, about 49,000 refugees were. Nebraska’s figures have fallen from 1,056 to 279. Last year, Nebraska resettled 104 Somalis. This year, that number is five.
Hassan Osman Omar, chairman of Somali Community Service Inc., said, “This is not justice.”
Omar’s phone lit up Tuesday as members of Omaha’s Somali community called with concerns about their husband, wife, children or parents who are still overseas.
“Everyone was shocked,” he said of the ruling. “They see it as a discrimination policy on another level.”
Another majority Muslim country, Chad, was removed from the list in April after improving “its identity-management and information sharing practices,” Trump said in a proclamation.
Chad was one of three examples — Iraq and Sudan are the others — of Muslim-majority countries removed from the travel ban list. In her analysis for a Supreme Court blog, SCOTUSblog, Amy Howe said Justice Roberts noted that the removal of those countries and exceptions in the order allowing in some citizens from almost all the countries shored up the government’s argument that the ban was about national security, not religion.
Dan Stein, head of the Federation for American Immigration Reform, which seeks to drastically reduce immigration, called Trump’s policy a “common sense reaction to the new realities of terrorism.”
Local conservative radio host Ian Swanson said the Supreme Court correctly gave the president the latitude to make decisions on immigration and national security and said his listeners on 94.5 FM/1420 AM The Answer largely side with Trump and the travel ban.
Swanson criticized Trump’s first travel ban, calling it unhelpful.
Trump twice last year had tried to block travel from certain countries. The first time resulted in chaos at major airports as the decision came abruptly, without time to communicate the rules. Lower courts that time and a second time struck down the bans.
The State of Hawaii led the charge against the latest travel ban, arguing unsuccessfully that the president was overreaching his authority and that the ban targeted Muslims and people of certain nationalities in violation of the U.S. Constitution.
Somalia is a long-troubled country. Civil war and drought there have forced millions of its citizens from their homes. Some 2.1 million Somalis are displaced within the country’s borders on the horn of Africa. An additional 870,000 are registered as refugees by the United Nations.
Since 1991, the U.S. has resettled about 104,000 Somali refugees, with 12,000 going to Nebraska and 9,000 to Iowa, according to federal counts.
At a recent meeting with a handful of Somali Nebraskans, they shared stories of separation and their own self-sufficiency here. They had papers and identification cards showing that they lived in Omaha and had factory or meat-production jobs.
Elmi Garad Egal, clutching his U.S. passport to show his citizenship since 2011, said he has been apart from his son for more than 10 years. Sadia Mohamed, a 35-year-old assistant nurse at the Douglas County Health Center, was shot in the leg as a child and is desperate to bring her kindergarten-age niece here.
Subow was born in Somalia, fled from there in 2003 and came to Omaha in 2010. She said her mother’s petition was approved at first. She said she was thrilled at the prospect of having her mother come to Omaha, where she could be safe and could help Subow, a single mother working at Majors Plastic and juggling care for two middle school-age children.
But on May 22, she said her mother was summoned to the U.S. Embassy in Nairobi, Kenya, and given a document that told her the case was pending until the travel ban policy changed.
“Pending,” noted Omar, the Somali Community Service chairman, “can be forever.”
This report includes material from the Associated Press.
LINCOLN — Even as Goodwill Omaha drifted from its mission, the number of needy clients served fell and employee morale plummeted, the inattentive trustees of the nonprofit continued to heap bonuses and other excessive pay on CEO Frank McGree.
Those were among the findings of a 19-month investigation by the Nebraska attorney general into Omaha’s Goodwill affiliate, a probe prompted by a World-Herald investigative series in 2016.
Attorney General Doug Peterson’s investigation didn’t result in any criminal charges or legal efforts to claw back any of McGree’s pay. Peterson said state law limited what was possible on that.
But he did secure changes to Goodwill’s board, got the charity to agree to other new business practices as part of a court decree and expressed confidence that Goodwill’s new leadership team has the charity refocused on its mission.
“Our priorities have been to ensure that the bad actors at Goodwill are removed, that the board members and executive staff are truly mission-focused, that the jobs Goodwill Omaha creates are preserved, and that the people it is designed to help are truly served,” Peterson’s report said. “Those interests are not served by dragging Goodwill Omaha through further legal battles.”
The attorney general’s investigation did conclude that the pay to McGree and other Goodwill executives was excessive. But he said Nebraska’s laws governing nonprofit corporations mostly relate to conduct of boards of trustees, not executives like McGree, who Peterson said was primarily to blame for the problems at Goodwill. The Goodwill board was lax in its oversight and unaware that virtually none of the millions in profits from the charity’s signature thrift stores was going toward charitable purposes, Peterson said.
“Our investigation revealed the main problem at Goodwill Omaha was poor management by former President and CEO Frank McGree,” the report said. “Unfortunately, we concluded that there were inadequate legal remedies to pursue any claim of restitution against McGree and inadequate evidence of wrongdoing to pursue any claim” against the unpaid volunteer trustees.
Peterson said he thought that it would be appropriate for the Legislature to examine whether state law needs to be changed to put more legal responsibility on executives for how charities are run. He said what happened at Goodwill should also be a lesson for other charities on the importance of staying focused on their mission.
One result of Peterson’s investigation appears to have been wholesale changes to Goodwill Omaha’s board of trustees. Three-fourths of the 20 trustees have now turned over, in part because Peterson convinced the charity to agree to a smaller 13-member board.
Michael McGinnis, who since October has served as Goodwill’s new CEO, on Tuesday expressed relief to have the legal review concluded. He said the charity is still dealing with the fallout from the 2016 disclosures, with donations still lagging.
“We appreciate the attorney general mentioning the things we’ve done to get Goodwill back on a good path,” he said.
He said Goodwill Omaha also has resolved another legal issue that has hung over it, a federal lawsuit filed by McGree seeking a $550,000 severance payment he said he’s owed by Goodwill. McGinnis said the court settlement forbids him from disclosing the details, though he said the terms will ultimately be revealed when Goodwill files its tax return next year.
In the end, Peterson’s investigation echoed the main conclusions of the newspaper’s series.
The World-Herald in October 2016 published an investigation detailing corporate-style executive pay and a profits-driven culture at the widely known charity that sells publicly donated used goods to employ needy job seekers.
McGree received base pay, retirement pay, bonuses and other compensation exceeding $400,000 annually — more than double the average for CEOs at other Omaha social service nonprofits. A $519,000 lump sum retirement payment in 2014 boosted his pay that year to close to $1 million. In all, 14 executives were paid $100,000 or more, the most for its size of any Goodwill affiliate in the country.
Goodwill spent so much on executive pay that scant dollars from its stores were left to support the community jobs programs that are central to the charity’s mission. Despite claims that donating to Goodwill would help needy job seekers, Goodwill’s jobs programs were almost completely funded by government contracts and grants, not store profits.
Under Nebraska law, the attorney general is charged with regulating charities and protecting their assets for public good. Using subpoena power, investigators with the attorney general’s charitable division obtained 140,000 pages of Goodwill documents and interviewed dozens of witnesses, including longtime CEO McGree.
The investigation traced the beginnings of Goodwill’s problems to 2000, when it began to ramp up its stores in the Omaha area from eight to 15. At that point, Peterson said, it appeared that the charity’s mission became maximizing store revenues instead of serving people. Executive pay spiked, but the number of clients served by the charity actually fell between 2012 and 2016, from 3,300 to 1,900, mostly because of a loss of federal contracts.
Investigators concluded that not a single dollar of store revenues between 2011 and 2015 supported job programs. They also found no evidence that money generated by a program in which customers were encouraged to round up their bill to the next dollar went toward the mission. In addition, executive expense reimbursements for food, drink and entertainment shot up from $235,872 in 2013 to $345,567 in 2016.
“As Goodwill Omaha grew, it operated more and more like a for-profit business,” the report said.
Peterson said that there came to be “no correlation at all” between how the charity was performing its true mission and what executives were paid and that excessive pay further deprived Goodwill of dollars for its mission.
Peterson said the board missed many red flags. Much of its important business was on a “consent agenda” that was not discussed at meetings. Most board members placed too much trust in McGree, whom they had become convinced was one of the best Goodwill CEOs in the nation. As a result, they were taken by surprise when The World-Herald came out with its findings.
“It was evident in our interviews of the former board members that they were shocked by much of the reporting in The World-Herald’s series exposing abuses,” the report said. “(I)t seems self-evident ... those directors were not sufficiently engaged.”
Peterson said that while he was critical of the past trustees, he lauded both past and current trustees for changes made to right the charity, including replacing all its high-paid executives, cutting CEO pay in half, reducing employees paid $100,000 or more from 14 to 3, and bringing in an outside consultant to address the internal culture.
During the investigation, Peterson said, he developed “a healthy confidence” in McGinnis. He said he thinks people in Omaha can be confident in Goodwill now, too.
“I do want to state to the Omaha community that the Goodwill portrayed in The World-Herald stories in 2016 is now a completely changed and properly directed organization in 2018,” he said. “I think it’s a different place.”
Goodwill Omaha executives had a problem.
It was 2013, and the nonprofit’s employees were complaining about a program called “repack” — an innocent-sounding task that symbolized just how far Goodwill had strayed off course.
For years, managers had instructed disabled teens and other vulnerable Omahans to take hair rollers shipped to the nonprofit from a Council Bluffs company, repack them into new containers, and slap on a red, white and blue label.
“Made in the USA,” it said. Except the hair rollers were made in China, a fact not shared with the disabled teens or recently released prisoners doing the actual repacking for little or no money.
When employees voiced concerns about the “repack” program in 2013 — worried that it might be illegal and definitely seemed wrong — Goodwill execs did not end it, according to a blistering new report from the Nebraska Attorney General’s Office.
Instead, they talked about the following problem: What do we do if we get caught?
“These discussions were not focused on correcting the process, by either stopping the practice ... or terminating the contract,” says the report authored by Nebraska Attorney General Doug Peterson and top aides. “Goodwill Omaha employees instead discussed how to explain or handle it if anyone found out what they were doing.”
The repack issue fills but one page in the 44-page report. Those 44 pages paint a picture of a broken nonprofit whose leaders — now ex-leaders — had lost sight of the reason for Goodwill Omaha’s existence.
It also seeks to answer a question, one I have wondered about since reporter Henry Cordes and I uncovered administrative bloat, eye-popping executive salaries, a “store profit-over-programs” mentality and various other ethical breaches during our weeklong 2016 series on Goodwill.
The question is this: How did an Omaha nonprofit get to a place where something like “repack” would ever be tolerated?
The Nebraska Attorney General’s Office investigators devote page after page to answering that question, but I think it can be summed up in a single word: culture.
Its board rubber-stamped decisions by longtime CEO Frank McGree and handed out executive bonuses like candy even as the nonprofit struggled.
The culture there was amicably hands-off, with board members being too disconnected, too personally close to McGree or too trusting of his cheery presentations at board meetings.
“Casualness is its worst enemy,” Peterson said Tuesday. “Casualness, and familiarity with the CEO. I was disappointed, because I thought there were some red flags that should be responded to.
“Ultimately we concluded that the board failed in its responsibility.”
Employees who believed that Goodwill was veering off the rails tried but failed to get it back on track. They were blocked by a culture in which dissent was discouraged and often hidden from the board, the report says.
It quotes employee after employee saying that they felt uncomfortable taking ethical complaints to superiors, and many high-level employees saying that no one but McGree could speak freely to the board.
McGree had instilled a “no snitch” policy at Goodwill Omaha, one senior human resources professional told the attorney general’s investigators. She said the general perception was that the former CEO did not tolerate criticism of himself or other Goodwill executives, and described her discomfort at reporting executive misconduct to him.
Said a senior financial executive to investigators: “(The majority of the executive staff) feared for our jobs. We had seen in the past people that had questioned authority and were let go.”
And, as we uncovered in 2016, the attorney general’s report says Goodwill leaders routinely misled Omahans into believing that the hand-me-down clothes and used appliances we donated to the nonprofit were helping our city’s most vulnerable residents. In reality, the store profits were almost entirely used to pay employees, executives and overhead.
“You started to wonder if this was a nonprofit or a retail operation with secondhand clothing,” Peterson said at Tuesday’s press conference. “Goodwill was very much pushing the line in that regard.”
The culture pushed by McGree and other top executives was a “run it like a business” mantra that emphasized — and then eventually pretended — that more stores and more clothing sold equaled more programs and services for vulnerable Omahans.
There were many problems with this mantra, chief among them this: Goodwill isn’t a business. It’s a nonprofit that is supposed to be devoted to helping Omaha’s most vulnerable people find employment.
Instead, Peterson told me after the press conference Tuesday, “All you saw was, scale up on the number of stores, scale up on the operating expenses, scale up on the compensation. There was no correlation with the number of people served. None.”
So the culture, or maybe more precisely, a mishmash of cultural problems — a compliant board, a stifled workforce and a foolhardy, profit for profit’s sake strategy — led to the repack situation. It led to a situation in which an Omaha nonprofit was telling mentally and physically handicapped people to turn Chinese hair rollers into “American” ones.
It led to this silly, shady, deceitful money grab.
Peterson said Tuesday that he considered pursuing fines or other civil penalties related to potential deceptive trade practices performed by the Iowa company and Goodwill. But the Iowa company is now out of business, and Peterson decided to focus on restructuring Goodwill’s leadership rather than trying to further punish it.
In a 2016 interview, the Nebraska attorney general asked then ousted Goodwill CEO McGree about the hair rollers. McGree told him that he didn’t learn about the practice until August 2016, and canceled the contract immediately.
But the paper trail tells a different story, the report notes:
Goodwill didn’t terminate that repackaging contract with the Iowa company, named Prestige Products, until Oct. 25, 2016. That’s two days after my original column about the Chinese hair rollers that were magically turned into American-made ones.
And that was a single day before McGree at last agreed to answer The World-Herald’s questions and assured us that Goodwill no longer did repacking.
After continuing it for years, Goodwill Omaha canceled the hair roller contract one day before its leader had to speak about it to the public.